Peloton Interactive, Inc.

Good day and welcome to Peloton's fourth quarter and fiscal year 2026 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. James Marsh, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to Peloton's fourth quarter and fiscal year 2026 conference call. Joining today's call are Peloton Chief Executive Officer and President, Peter Stern, and our new Chief Financial Officer, Sid Packer. Our comments and responses to your questions reflect management's views as of today only and will include forward-looking statements related to our business under federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business. Please refer to our SEC filings, today's press releases, and our earnings presentation, all of which can be found on our investor relations website for a discussion of material risks and other important factors that could impact our results. All results discussed today are on an as-reported basis, which include our previously mentioned cost reassignments that began in the beginning of fiscal 26. Please refer to our investor presentation for reconciliations of the impacts of these cost assignments. During this call, we will discuss both GAAP and non-GAAP financial measures. The reconciliation of GAAP to non-GAAP financial measures and definitions for our user metrics are also provided in today's press release. I'll now turn it over to Peter.

Thanks, James, and good morning, everyone. As my first full fiscal year comes to a close, we enter the new year with a strong financial and operational foundation. FY26 was filled with product innovations, exciting additions to our leadership and instructor teams, and more ways than ever to help our members live fit, strong, long, and happy. We've also made meaningful progress on our journey to evolve from a connected fitness company to a connected wellness ecosystem. This ambition defines the future of Peloton and positions us to participate in a $7 trillion global market centered on longevity and healthspan. Our magic formula of premium hardware, intuitive software, world-class coaching, and supportive community powers our beloved brand and gives us permission to gradually and systematically capture share in the broader wellness market in the years ahead. Our strategy is built on four pillars. One, improving member outcomes. Two, meeting members everywhere. Three, Making Members for Life, and 4. Business Excellence. I'm proud to report that we continue to make substantial strides across each of these pillars. Starting with improving member outcomes, which is where we focus on human impact. Improving our members' fitness, strength, longevity, and happiness. The more we help our members achieve these outcomes, the more we fuel retention. A key driver of this is our product innovation. In FY26, we introduced the Cross Training Series, a refresh of our products across bike, tread, and row. And we launched Peloton IQ, a huge step forward in our use of AI to deliver a more personalized experience to our members. In Q4, more than 50% of monthly active users engaged with personalized guidance powered by Peloton IQ. Our product innovation engine is now firing on all cylinders. And during this calendar year, we will launch additional new equipment in an existing category while delivering much more customized, personalized guidance to help our members achieve their individual goals. We also continue to innovate on our programming. For example, by expanding our specialized content with offerings like the Pace Your Race Marathon Training Program and Highlit+. a very popular high-intensity, low-impact cross-training program. These class and programming additions directly reflect the engagement trends we're seeing from our members. Speaking of engagement, in Q4, Pilates workouts and workout time were up year-over-year by 44% and 53%, respectively. Given this rapidly growing member demand, In Q4, we executed the acquisition of Scope, an early innovator in connected Pilates with foundational technologies and deep expertise. This move will enhance our R&D efforts and enable us to deliver even more distinctive experiences in this category. The second pillar of our strategy is to meet members everywhere. We know Peloton members are deeply connected to their community, instructors, and class programs, and we're committed to bringing our experiences to them wherever they are. Formed just a year ago, our commercial business unit has become central to this strategy by increasing our reach outside the home and in more hotels and gyms across our key markets. Our CBU delivered double-digit year-over-year revenue growth in fiscal 2026, with growth across all regions and across all major product categories. We estimate that we're approaching 4% of the commercial fitness equipment market segment, leaving enormous headroom for growth, and we're encouraged by the increasing demand for our products. In the next few months, we will launch the Peloton Commercial Series, The first Peloton bike and treadmill built to accommodate the duty cycle of high-traffic commercial gyms. We anticipate that with the benefit of this new equipment, alongside additional investment in our CBU sales team and product development, we will see accelerating growth from the CBU in fiscal 27 and beyond. Another way we meet members everywhere is through our retail stores. We ended the year with a highly capital-efficient footprint of 10 microstores, which consistently outperform our historical fleet of legacy showrooms. Based on this success, over the past few weeks we have launched three additional microstores, and we plan to add an additional seven microstores in time for the holidays, which would result in a doubling of our microstore footprint this year. Thank you so much for joining us. Recently, Mexico became the most engaged country outside the U.S. with our content on Spotify. Lastly, Meeting Members Everywhere also includes meeting members in real-life events and activations. This year, our instructors represented Peloton in more than 160 events worldwide, a more than three-fold increase year-over-year, including major marathons in New York, Berlin, and Sydney, as well as premier wellness festivals and run clubs. Our third pillar, Members for Life, focuses on maximizing lifetime value and keeping our members active and engaged. 316,000 of our members now own multiple connected fitness products, up more than 20,000 year over year, and these members churn at significantly lower rates than those who own just one. As a result, Not only are new products meant to attract new members, but they also keep our existing ones with us for longer. We're also driving member loyalty through Club Peloton, which our members have deeply embraced since its October launch. Club Peloton rewards were applied to 70% of apparel sales on our site in June. We continue to evolve this program, and in Q4 we launched new milestones and weekly streak badges to celebrate our most committed members. We remain proud of our strong member retention. While we saw an uptick in Q4 churn driven in part by one-time events, we expect our year-over-year churn rate to moderate over the course of FY27. On a full-year basis, we expect churn to be roughly flat versus FY26. Last but not least, is business excellence. When I started at Peloton, I explained we'd see consistent progress from the bottom of the P&L up. This past year, we made material improvements in our financial and operational foundation, and I'm pleased to share that we have delivered Peloton's first full year of both positive net income and positive operating income at $63 million and $161 million, respectively. In addition, we delivered $468 million of adjusted EBITDA, an increase of $65 million, or 16% year-over-year, and $378 million of free cash flow, an increase of $54 million, or 17% year-over-year. This profitability growth reflects the significant progress we've made in improving our cost structure. and I can report that we exceeded this goal. Moving further up the P&L, we're pleased to have achieved our second consecutive quarter of year-over-year revenue growth in Q4. Turning to FY27, our core business trends continue to improve and our business is the healthiest it has ever been as we're projecting the highest total gross margin, Adjusted EBITDA and Net Income in the Company's History. And looking beyond FY27, I'm excited about our multi-year product roadmap of both consumer and commercial products. This roadmap includes groundbreaking offerings in entirely new categories that broaden our total addressable market. The first of these new consumer product categories will launch in the fall of 2027, followed by more thereafter. We expect investments in these categories will result in an acceleration of our year-over-year revenue trajectory. Delivering breakthrough product innovation takes time, especially hardware like ours. But we're investing with discipline in areas where we have confidence in the returns. I'm proud of our progress over the last 18 months in filling the product pipeline. This work makes me deeply optimistic about Peloton's future and our team's ability to execute on our next chapter. This is what a successful multi-year business transformation looks like, and I want to share my gratitude to Peloton's team members, partners, shareholders, and members for taking this journey with us. With that, I'm pleased to introduce our wonderful new Chief Financial Officer, Sid Thacker, who will share more details with you.

Thanks, Peter. Before I begin, I wanted to share how thrilled I am to be on this journey here at Peloton. The company has many strategic advantages. Its iconic brand, industry-leading instructors, and its deeply loyal community. And I'm looking forward to working with our team members to build an even stronger Peloton. Before joining, I knew we had real work to do to improve our growth trajectory, and that getting this business back to sustained growth wouldn't be an idiot. But since I started, two things have become very clear to me. The first is that the underlying strengths of this business and brand are real. We benefit from enviable churn, providing a high-margin recurring revenue stream, which provides the foundation for our three-pass low generation. Our brand remains exceptionally strong, with all of our cross-training series products measured having an NPS score above 70, on a scale from negative 100 to 100. Thank you for watching. Additionally, I see a sizable and immediate opportunity with a commercial business unit to drive profitable growth. In terms of a capital allocation strategy, I see significant cash generation at Peloton in the years ahead, giving us the resources to invest in future growth while also deploying capital to benefit shareholders. In the near term, we are already working toward a refinancing of our balance sheet and have begun the process with our bankers. We'll have more to report back in the coming weeks, recognizing that August is a slow month for capital markets activity. Ultimately, we find ourselves in an excellent position to capitalize on the growing fitness and wellness market. Our best-in-class innovation pipeline, paired with an improved financial position and a highly talented collaborative team, makes the path forward clear. We know the work ahead of us, we know how to execute, and we are moving quickly. Diving into our Q4 financial results, we ended the quarter with 2.553 million ending paid connected business subscriptions within our guidance range. Q4 net churn of 2.2% reflects an increase of 37 basis points year-over-year. 17 basis points, or roughly half of this headwind, are the result of one-time factors, most notably a change to our payment reactivation algorithm that we made in Q3 that had an unanticipated adverse impact of reactivations from involuntary churn in Q4. We addressed that change last month and have since observed a normalization of our involuntary churn. Looking ahead to fiscal 2027, we expect churn to be roughly slapped year-over-year on a full-year basis. Total revenue was $608 million in Q4, which outperformed the high end of our implied guidance range by $6 million. and reflect slight but nonetheless positive year-over-year growth. Outperformance relative to guidance was driven by higher connective fitness equipment sales across Peloton and Precor brands. Total gross profit was $344 million in Q4, an increase of $16 million of 5% year-over-year. Total gross margin was 56.7% in Q4, an increase of 260 basis points year-over-year and roughly in line with our Q4 implied guidance. Please refer to our investor presentation for the segment-level rate counts for revenue and gross margin. Total adjusted operating expenses, which exclude restructuring and impairment expenses, was $257 million in Q4. Excluding the impact of $24 million of non-recurring accrued legal contingencies related to patent litigation, adjusted operating expenses decreased $29 million or 11% year-over-year, reflecting the continued progress we've made in right-sizing our cost structure. We remain focused on managing dilution through a disciplined approach to equity compensation, which includes changes in our program design and tying more stock-based compensation to financial performance. Our stock-based compensation expense was $43 million and decreased $10 million or 19% year-over-year in Q4. This represents the lowest stock-based compensation we've had in many years. As Peter noted, we exceeded our goal to achieve at least $100 million of runway cost savings by the end of fiscal 2026. Adjusted EBITDA for Q4 was $142 million or 23% of total revenues. Excluding the $24 million impact from accrued legal contingencies related to patent litigation, adjusted EBITDA would have been $166 million, an increase of $26 million or 19% year-over-year, and $12 million above the high end of our guidance range. Q4 free cash flow of $89 million represented a decrease of $24 million or 21% year-over-year. primarily related to net working capital timing. On a full year basis, we generated $378 million of free cash flow in fiscal year 26, an increase of $54 million, or 17% year-over-year. Turning to our balance sheet, we ended the quarter with a strong cash position of $1.21 billion, and increase of $167 million year-over-year after paying down $200 million of debt in Q3. We currently have $93 million of net debt, which decreased $367 million, or 80%, year-over-year. Our growth and net leverage ratios have improved meaningfully to 2.8 times and 0.3 times, respectively. Next, I'd like to share context for our financial outlook. For full fiscal year 2027 and on a quarterly basis, we are providing guidance for total revenue, total growth margin, and adjusted EBITDA. We will also continue to provide an annual target for minimum pre-cash flow and a quarterly guidance range for ending paid connected fitness subscriptions. A whole fiscal year 2027 total revenue outlook of $2.3 to $2.4 billion reflects a 3.9% revenue decrease year-over-year at the midpoint. Let me put this in context. If we normalize last year's subscription price increase, which drove a one-time benefit in our year-over-year revenue trend, our year-over-year trajectory is actually improving in fiscal year 2027. We are expecting an improving trend of both equipment unit sales and revenue driven by new product introductions before the end of the calendar year, which also contributes to a continued flattening of the curve on connected fitness subscription growth additions. We believe the product introductions in fiscal 2027, combined with the entry into new categories in fiscal 2028 and beyond, provides the foundation for revenue acceleration. Q1 total revenue is expected to be $545 to $565 million and reflects an increase of 1% year-over-year at the midpoint as a result of higher subscription revenue due to pricing changes made in Q2 of last year. Similar to fiscal 2026, we expect Q1 to be a seasonally low quarter for equipment sales. Full-year fiscal 2027 total gross margin is expected to be roughly 54%. Reflecting an increase of approximately 140 basis points year-over-year, primarily driven by higher expected connected fitness gross margin. Our Q1 fiscal 2027 total gross margin outlook is roughly 57%. This reflects our expectation for a higher mixed subscription revenue relative to full-year fiscal 2027, which has a higher segment gross margin. Our full-year fiscal 2027 adjusted EBITDA guidance of $475 to $525 million reflects an increase of $32 million, or 7% year-over-year at the midpoint, primarily driven by operating expense savings connected to right-sizing our cost structure and the non-recurring accrued legal contingency related to patent litigation defaults in Q4 of fiscal 2026. Q1 adjusted EBITDA is expected to be within the range of $135 million to $145 million, reflecting an increase of $23 million or 18% year-over-year at the midpoint, primarily driven by higher revenue from subscription pricing, costs related to a buy-plus-feet-post recall last year, and lower operating expenses. Q1 Connected Fitness Subscription Guidance of 2.455 to 2.475 million reflect the euro-year decrease of 9.8% at the midpoint, reflecting the tougher comparison to Q1 of last year, which was the final quarter before the price increase. While we expect Q1 net churn to be higher than Q1 of last year, we expect euro-year net churn trends to moderate over the course of fiscal 2027 as we last last year's price increase, and to end the year roughly flat on a full-year basis. We remain committed to generating meaningful free cash flow and consistent with prior years are sharing a minimum free cash flow target. For fiscal 2027, our minimum target is at least $350 million. In conclusion, fiscal year 2027 represents a pivotal year, but we expect to launch the first in a series of important product innovations designed to return Peloton to growth. I'll now turn it over to James, who will kick off the Q&A with questions from our retail investors.

Thank you.

First question comes from David in Germany.

David asks, are there any plans to introduce technical equipment for strength training like tonal or expedient gym monster? There seems to be a huge market for Peloton with the power of Peloton classes, trainers, and community.

Maybe, Peter, you can handle this one. David, thanks so much for the question. I'm really glad you asked about strength training because after cardio it's the most important thing that I think our members can do to promote their health. I'm often asked actually what people what I recommend people should do and my suggestion is 70 minutes, 75 minutes a week of vigorous cardio or 150 minutes a week of Moderate Intensity Cardio Exercise, and two days a week of strength training. And I talked in the past about how roughly two million of our members engage with our strength programming in any quarter. Adding to that, we talked earlier about the growth in Pilates engagement on our platform, so we see a lot of opportunity in the strength category. In earnings, Paul is not the time for us to make major product announcements. But what I will tell you is that if you're interested in dumbbell strength training, the Cross Training Series Plus line that we launched last October is a great way for you to improve your strength. That equipment has industry-leading features for things like form feedback, rep counting, recommendations when it's time to go up or down in weights, all using our advanced camera vision technology. So I hope that keeps you really busy and building your strength while you wait for us to talk about some really cool stuff that we have in the works. I can't wait to share more about that in the future.

Great. Thanks, Peter. Our next question comes from Vikas in Los Angeles, leaderboard named Vik83. Vik asked two questions. First, do we expect to receive a tariff refund? And second, relates to a recent jury verdict in Delaware in favor of NEC for $20.5 million. What is the ongoing impact, if any, on margins in EBITDA from that? Maybe, Sid, you can handle those two.

Great. Thanks, James, and thanks, Vikas. Let me tackle tariffs first. Year-to-date, we've received $3 million of tariff refunds from the federal government. We do anticipate receiving additional refunds, but we have not incorporated them into our forecast for the quarter or year, just given the uncertainties around tariffs. On the second question, as you may have read in the press last week, a jury found that the standard third-party media players that we use to stream content infringed a patent. So while we're considering our legal options, in the meantime, we've booked a $23.8 million legal contingency accrual in Q4 of fiscal 26, which represents our estimate of the all-in cost if we were to pay the full amount today. We've also incorporated that same estimate into our minimum pre-cash flow target for fiscal 2027. In terms of go-forward impact, we, at this point, do not expect the go-forward impact of potential ongoing royalties to be material.

Operator, can we have a question from the field, please?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Simeon Siegel with Guggenheim Securities. Your line is open.

Thanks. Hey, everyone. Good morning. Hope you're having a nice summer. Peter, maybe can you, I'm going to tap on to Dave's comment or what, I don't remember his name, but can you elaborate on that, the new product introductions that you guys mentioned, just any thoughts to what you can share and maybe it sounds like we should be considering something from a revenue contribution perspective in the future. That sounds pretty exciting. So anything you could help us think through just to contextualize how big of a comment that was. And then also, can you guys elaborate on the involuntary churn comment that you had mentioned I'm curious, were you able to reactivate those who were involuntary churned post effects? Thank you.

Thanks a lot. I mean, this is Peter. I'll start with the first part of your questions relating to product introductions, and then Sid will address the involuntary churn question. This is what I can tell you. By the end of this calendar year, and recognizing that it's August, there aren't that many months left in the calendar year. We plan to, first of all, launch the Peloton commercial series. We've talked about that pretty specifically in the past and demonstrated those products. That's both a bike and a treadmill designed very specifically for the extremely high duty cycle of commercial fitness locations. We also plan to introduce some meaningful product innovations on the consumer side of the business focused on areas where we already offer experiences to our members. Starting in the fall of FY27, so, Cindy, I'm getting specific about timing again. In the fall of FY27, we will introduce the first – and many more. from that point looking forward. Sid, why don't you address the question about involuntary turn?

Okay. Let me just give you a little bit of color on the involuntary turn issue. As we mentioned in the prepared remarks, about 50% of the change in Q4 year-over-year in turn was caused by these one-time factors. So specifically what happened was we made a change to our reactivation algorithm in Q3 Thank you for your time. reverted back the previous payment recapture flow and we've seen the involuntary turn start to normalize now. Separately, since that point in time, we've also reached out to affected members and had some success in reactivating members that left because of these payment issues.

I just want to clarify one thing that I said earlier. The new product introductions, new categories, those will be the fall of calendar 27th. So just to make sure we're all clear on that, that's in fiscal 2018. Great.

Thanks, Peter. Operator, next question, please. Thanks, guys.

Thank you. One moment for our next question. And that will come from the line of Shweta Kajuria with Wolf Research. Your line is open.

Thank you for getting my question. Could I please follow up on the first part of the last question, which is on the new product revenue expectations? Peter, if you were to contextualize the opportunity across the new products and new revenue sources, how would you help us frame the size of the opportunity across the new products and how revenue could trend? Where do you see the largest opportunity? How do you think The timing of realization of that would work against the visibility that those revenue sources provide you. And second is, should we be going forward be looking more at revenue as a key metric historically? Of course, it's been focused on subscription and subscriber growth, but is that a change going forward? Thank you.

Hi, Shweta. Thanks for the questions. So we're not providing guidance beyond the FY27 period for any of our metrics, inclusive of revenue. But let me at least try to provide a bit of framing in how we look at these things. So, you know, what you'll see this year from our commercial launches is what we believe the foundation for accelerating growth in our commercial business unit. The way to look at that is that we already delivered double-digit growth from the commercial business unit in FY26, basically on the back of just the pre-core portfolio. With the introduction of the Peloton commercial series, we now turbocharge the growth rate of the commercial business unit by providing a dual brand strategy and the power of Peloton which we know many gyms have requested. That will manifest principally in our connected fitness sales and therefore in revenue although the Peloton equipment does have a subscription attached to it and so you will also see some subscription revenue but note that the realization of The equipment sales tend to be front-loaded and then the impact of subscriber growth in a new category like that is cumulative. In terms of the launches on the consumer side this year, not being terribly specific about that, but that should behave much like our existing consumer business. So you'll see it spread across CF sales and to the extent the sales are to new members as opposed to existing members, you will see That also manifests in our subscription revenue. As we get to FY28 and the introduction of products in new categories that grow our total adjustable market, you'll see, again, a front-loaded impact on the CF sales line because the hardware revenue is recognized immediately upon the sale and delivery of those units. And then you will hopefully see the beginnings or the accumulation of the subscriber impacts, both in terms of our gross ads, the bending of the curve we expect on net ads, and of course the improved trajectory on subscriber revenue. It's too soon for us to say what that will result in with any level of specificity. These are new products in new categories for us. But our expectation is that by growing our market in this way, this is how we move Peloton into the next phase of our transformation. And to very specifically answer your question, what I think you should expect is revenue growth should precede a change towards subscriber growth. both because of the combination of the CBU, which is heavily weighted toward equipment sales, and because the impact on subscriber revenues lags the impact, and on numbers of subscribers, lags the impact on CF sales.

Thanks, Peter.

One moment for our next question. And that will come from the line of our fine coach, Ryan, with UBS. Your line is open.

Hi, good morning. Thanks for taking my question. And Sid, welcome to the call. You talked about slash churn year over year for 2027 fiscal year, which I think would have been good news for everyone. But now that base for 2026 is slightly higher. But it seems like you were suggesting that you've seen some normalization in churn since that change was introduced. First, could you talk a little bit more about what exactly you've seen, what rate of normalization you've seen since the change was made? And then Does that mean that there's a chance that the current guide could actually be a little bit better year-over-year if we see that rate of normalization continue because it's given basically your guiding flat on the current base?

Yeah, sure. Thanks for the question. I think the way to think about this is if you look at Q4, you look at the roughly 37 basis points year-over-year change in turn, About half of that was related to this involuntary churn issue of the one-time factors, and about half of it we still think is a result of the lingering impact of the price increase we took in October. So if you think about, you know, our guidance for flat churn year-over-year, what we would expect to see is in Q1, we still expect higher churn year-over-year because we're still comparing against a period that didn't have the impact of the price increase. and then as we start to anniversary the price increase, we should start to see more favorable turn trends and a moderation of turn trends. I think the only other thing to keep in mind as you think about the quarterly cadence of turn is we actually experienced a relatively favorable year-over-year turn rate in the third quarter because a bunch of people that paused as a result of the price increase came back in Q3. So that's the only thing to keep in mind, but other than that, we should start to see much improved turn trends relative to Q1 once we start the anniversary of the price increase. But we factored in the normalization of the involuntary churn in our expectation that churn will be flat year over year for the full year.

Okay. Okay, that's helpful. Thank you. And then a quick follow-up. You know, thinking about your capital allocation priorities as it relates to growth and how you think about buybacks versus investing back in the business to drive growth and where it makes sense maybe to deploy capital inorganically versus buyback stocks, If you could comment on that.

Yeah, so let me just start by saying, you know, before we do anything, the first thing we have to do is we need to get our refinancing done. That refinancing, we expect, will deliver on both our previously stated goals of lowering our cost of capital as well as providing greater flexibility. So we've begun the refinancing process with our bankers. We'll have more to report as we conclude that process. But you're right. I mean, what we've said publicly in the past is we think a growth debt to EBITDA ratio of somewhere in the 2 to 4x range is a sustainable level of growth debt. So what that will imply is We have a substantial amount of excess cash on the balance sheet today. When we're thinking about deploying that cash, I think we're going to do what's in the best long-term interest of shareholders. I will say that I've been an investor for many years, and I do understand very deeply the impact of deploying a capital rise we can have. When we think about decisions like M&A or buyback, what we're thinking about is, number one, how do we improve this business? How do we maximize shareholder value? We examine the expected returns from any capital allocation decision, not only against our cost of capital, but also against all other available options. And we're also thinking about not only just the expected returns, but also the risks inherent in any decisions we make. And we want to make sure that we operate at the sufficient margin of safety. So we'll have more to report soon on the capital allocation problem.

Thank you very much.

Thank you. One moment for our next question. and that will come from the line of Doug Annews with J.P. Morgan. Your line is open.

Thanks so much for the questions. I have two. Just first, Peter, on Peloton IQ, can you just talk more about how members are interacting here with your AI-driven tools and what impact you're seeing in terms of engagement and retention there? and then secondly, just as you launch the Peloton commercial series and CBU becomes a little bigger part of the mix, can you talk about any impact on revenue per hardware unit and then also on margins?

Thanks. Of course, Doug. So let's start with Peloton IQ. Love that question because it's just such a positive way for us to take advantage of and the revolution that's happening around AI on behalf of our members. And we do that by delivering personalized insights and recommendations. It turns out that based on our research, Telecom IQ has now become the number one feature of interest from our potential customers. And so that shows what a big competitive differentiator this can be. The things that people are using across the board, our members are starting to engage with what we call Peloton IQ Insights. So we're providing somewhere between three to five insights for our members every week about ways that they can enhance their workout program. And we've got more than 50% of our monthly active users now engaging with that. For the Relatively smaller percentage of customers that have already switched over to the plus side of the cross-training series, that's where we see people getting the most benefit from what Peloton IQ can do because those are the people who are using it for things like form feedback and rep tracking and even more adaptive coaching. Let me give a sneak peek of what to expect looking forward. So our next frontier for PelotonIQ is moving to much deeper personalization, and that's things like enabling a much wider array or even an infinite number of open-ended goals and being able to adjust programs much more dynamically based on what we're observing over time and even in the moment from our members. We're also working on integrating even more wearables data because there's obviously a revolution taking place around the adoption use of wearables, and we want to support as many of them as we possibly can. So we're already excited about Peloton IQ. It's making a difference in differentiating our product. People are using it extensively, and we have much more to come on that. Now, second question was about the impact of the CBU for hardware units and our margins. Our FY27 guidance does incorporate the impact of accelerating growth from the CBU. And as I mentioned earlier in response to Arpina's question, that's principally manifested on the revenue side in terms of CF sales. although there is a component of subscriptions that will start to lay in. The way to think about this category is it's evolved differently from the home fitness space in that it has historically been one in which there is not a tail of subscriptions. The market is based on the sale of equipment only and so there are typically higher margins and higher prices associated with that equipment. There also is a higher price associated with that equipment in that the equipment needs to be manufactured for an extraordinarily high level of usage and also typically, at least in our case, given our tremendous commitment to quality on the pre-course side, comes bundled with a longer standard warranty than you would find on the consumer or the residential side of the business. So what you see in from the CBU is higher revenue per sale. You also see higher margins. And the CF margins that we publish represent a blend of the higher gross margins from the CBU and the lower relative gross margins on the consumer side.

Next question, operator.

Thank you. One moment for our next question. That will come from the line of Yousef Swali with Truist. Your line is open.

Great. Thanks for taking the question. Hi, this is Robert. I'm for Yousef. On the planned new upcoming launches, do you expect that revenue acceleration to come more from cross-sell opportunities to existing users, or do you view it as a way to broaden your reach at lower ASPs? And then I'm curious on the planned CAC and margin impact over the first year or two. from those new plan new launches. Thanks.

So let me focus on this year, which is what we have built into our guidance and which we're prepared to provide a little bit more specificity on. So we historically do see in our existing categories a blend of sales to both existing and new users. and we anticipate that we will see the same thing on the consumer or the residential side this year. So again, just the roughest estimate I can give you is think about something in the vicinity of kind of 50-50 between existing members and new members for the sales of the consumer equipment this year. As we look forward to what we're doing in FY28 on the consumer side, That's certainly too soon to speculate on the blend between existing members and new members. But what I will say is that if to the extent we offer those types of products to existing members, they will receive a substantial discount to reflect their loyalty and the value that they provide us from their already existing primary subscription. So all of that is being built into our financial models, and we'll have more to share about that as we get closer. Okay, thanks.

One moment for our next question. And that will come from the line of Nathan Feather with Morgan Stanley. Your line is open.

Hey, everyone. Thanks for taking the question. A little bit more on the wearable space here. Certainly seen a lot of growth in this market with some of the new capabilities that have been released. I guess you need to think about How you're approaching the space from a partnership versus ownership perspective. Is this an area you'd potentially consider getting into, especially given the deep connection that you have with your members? Thank you.

Yeah, Nathan, it's something that we've thought about in the past. And we've decided that given that there are so many compelling wearable options available to our members, in many cases offered by a range of extremely powerful and large companies to some also very innovative startups in that space. Rather than us attempting to compete with the players in those markets, the best way for us to work with the wearables industry is essentially to sort of play Switzerland here. and for us to integrate with as many of them as possible and build partnerships that range from both ingesting data that, again, based on our members' opt-in permission and subject to privacy requirements, providing our data back to those wearable companies so that they can provide the best possible insights to their members and also working with select members of the players in those industries to do things like co-marketing. So we don't, by not competing with them in that space, we have the most potential to be able to serve our members across every type of wearable that's out there and also to be able to use that as a way to grow our subscribers. To date, we've integrated with Apple, with Google, with Garmin. We've got a couple more big ones on the way. We'll have more to talk about that in the not-too-distant future. So I think we're approaching this in the way that is the absolutely most member-friendly way we can and recognizing our unique strengths and what we can contribute to while not overextending ourselves into places where we may have difficulty differentiating our company. Thank you.

Next question, please. We do have time for one last question, and that will come from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Thanks so much for taking the question. What do you think the hardware strategy and distributing hardware? You've been on a journey over the last couple years in terms of go-to-market and retail and different partnerships approaches. What have been some of the key learnings as that go-to-market strategy has evolved? And when you think about where you want to take the product set forward over the next two to three years. How should we be thinking about the key priorities to make sure the products match up with the go-to-market and are aligned with some of those key learnings over the last couple of years in terms of how the mix might evolve? Thanks so much.

Yeah, Eric, that's a deep question. So let me try to approach it from a couple of different angles. The first way I'll approach that is looking back up the supply chain. So when I joined, Peloton was practically single-sourced in terms of our hardware business, which creates a great deal of dependency on a single provider, some risk and relatively limited negotiating leverage. While we feel great about our close partnerships, that we've enjoyed in that space. I think it's really important, and our COO, Charlie Kirol, has done a great job at this in ensuring that we have more flexibility and a better ability to compete and over time offer products at more compelling price points. Now, I raise that because one of the key learnings that we've discovered in the hardware space is that there is a pretty high level of price elasticity around consumer fitness equipment. And so it's important that we be able to offer products at price points that are accessible to our members. Another sort of takeaway from that is that we've learned to become, I think, really creative and many more. All the way up to our plus line, which is a premium offering that delivers really remarkable capabilities for helping people get fit. We've been able to introduce – I hate the way these words sound, but I'm just going to be a pure economist with you for a moment. We've been able to price discriminate, I think, very effectively in the bike market. With regard to some of the other categories, we have less ability to do that. And so we'll be focusing on expanding our portfolio as well as the ways that our product can be accessed by our members in the coming years. Another thing that I think we've learned about hardware in this category is that people want to try it, and especially if it's something that is new to them. And that has driven not just the work that we've done on our first-party microstores, where we have, as I mentioned earlier, launched 13 microstores in the last just over a year. Actually, I think we're slated to launch two more by the end of today. So we're really, really excited about where we're going there. But also to significantly expand our third-party retail presence, whether it's through companies like Dick's Sporting Goods or the work that we've done with Johnson Fitness and Wellness. We've also got some exciting initiatives taking place in Canada. Big new relaunch with John Lewis in the UK. All of these are ways that we can give our members a chance to touch and feel and try our equipment. The reason I raise that is because as we start to introduce products in new categories, That's when fundamentally new categories, that's where that retail distribution is going to become even more important. So you can see us building the foundation for new types of hardware based on the insights that we've had to date.

Great. Thanks. That's really helpful. Thank you.

Thank you. I would now like to turn the call back over to Mr. Peter Stern for any closing remarks.

So recognizing that Many, if not most of our investors are also members. Before we close, I want to highlight a couple of programs that we have out there. One of them is Rebecca Kennedy's highly popular Highlit Plus program. I mentioned that earlier, but I just want to give you a sense of the magnitude of these things so that if you're motivated by FOMO, it gets you trying it. We've had more than 200,000 members taking part Over 1.2 million classes so far in High Lift Plus, so it's enormously successful. We also launched a new Sculpt 30 program that has classes available every Monday, and I highly recommend those. And then for those of you who haven't tried our Breathwork app, we introduced a new seven-day program. It's called Breathe Into Better Sleep. It counts towards your Peloton streaks. It counts toward Club Peloton. and after a day of earnings calls and investor meetings, I plan on using that tonight. So with that, I look forward to seeing all of you on the leaderboard and I want to thank everyone for the questions and for listening in.

This concludes today's program. Thank you all for participating. You may now disconnect.